What does the manufacturers' task force want? Lots

THE Gillard government now faces a host of tough budgetary and policy choices after its manufacturing task force urged it to cut business taxes, reduce "the impacts of the carbon price", and lift spending on infrastructure, skills and a range of other areas.

The task force, mostly of business and union leaders, warned that since 2008, the high dollar has cost 110,000 manufacturing jobs, 10 per cent of its workforce and 85,000 more are at risk.

With the dollar likely to stay high, the report said, the challenge is to create an economic environment and workplace culture that will make manufacturing more internationally competitive.

"This requires a business environment that supports continual innovation in products, processes and management," they said. But their 41 recommendations show this will not be cheap.

With manufacturing output 8 per cent below 2008 levels, they urge the government to bring forward infrastructure investment, buy more local content, create a housing recovery, and step up spending on small business and skills training.

The report proposes:

. A government-led effort to win Australian companies a bigger share of supply contracts for the $470 billion of mining-related investment in the pipeline, rather than see most of it go to imports.

. Bringing research institutes and industry together in "smarter Australia precincts", like Melbourne's Parkville medical precinct, so more of Australia's research expertise is directed towards making new products or improving them.

. Building on Australia's strengths by processing raw materials before export, especially processed food for Asia's markets.

. Developing more global niches in knowledge-intensive manufacturing, as Futuris has done in automotive interiors and CSL in plasma.

. Monitoring the impact of the carbon tax on emission-intensive industries, and ensuring it is "refined as needed" to keep firms globally competitive.

Prime Minister Julia Gillard said the government supports most of the report in principle, but shied away from committing to its spending proposals, saying they would be considered in the budget process.

She said the government's manufacturing support arms will combine to help Australian manufacturers bid for contracts in infrastructure and resource projects. It will also set up a "manufacturing leaders group" bringing employers, unions and government together.

"I want to make sure that we still have a strong manufacturing sector beyond the resources boom," she said. "Manufacturing provides us with a skill base, with innovation, and it provides working people with jobs."

Australian Industry Group CEO Innes Willox said Australian manufacturing needs to build on its strengths, improve its partnership with public sector research, become part of global supply chains and build a culture in which small manufacturers can grow big.

Mr Willox said manufacturing's biggest problem was the high dollar, quipping: "The dollar is number one, and it's about four games clear on top of the ladder." But industry must lift its productivity to become globally competitive even with a high dollar.

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It is time we intervened to hold back the dollar

OUR problem is the dollar. You can pontificate until you're blue in the face about productivity, or business taxes, or the carbon tax or cautious consumers and they're all important. But what is putting otherwise viable Australian businesses at risk now is the fact that our dollar is too high for them to compete.

On the broadest measure, the Australian dollar is now 72 per cent higher than it was a decade ago. Against the US dollar, it has almost doubled. At $US1.05 or more, it is 50 per cent higher than its long-term average of US70?, between 1985 and 2005, before the mining boom drove it up.

A high dollar makes Australian exports more expensive in the rest of the world. It makes imports cheaper here. It makes it cheaper for us to spend our money abroad as tourists or consumers and more expensive for the world to spend its money here.

If you lower the dollar, the other problems become second order issues. If you can't lower it, and it keeps going higher, then business and government may have to move hard and fast to find ways to save enterprises and the workers they employ.

That is the reality the Reserve Bank highlighted in its quarterly statement on monetary policy last week. It is the reality that has made its former board members Warwick McKibbin and Adrian Pagan urge it to try new ways to stop foreign demand for Australian dollars driving up its price.

In March, I wrote on this page that we need to talk about the high dollar, suggesting the Reserve should drop its hands-off policy, and intervene to cap its value, as the Bank of Switzerland has capped the value of the Swiss franc. That conversation has now begun, and about time.

The stakes are high: not only for our trade-exposed enterprises and their workers, but for both sides of politics. On July 1, we began living with the carbon tax that Tony Abbott has told us over and over will be "like a wrecking ball through our economy". It has become the defining issue of our politics, the prime mover for Abbott's rise in the polls and Julia Gillard's fall. Now the rhetoric of both will be put to the test.

In July, the wrecking ball failed to wreck anything. Last week the Bureau of Statistics estimated that seasonally adjusted employment grew by 14,000, and private analysts TD Securities and the Melbourne Institute estimated that inflation rose by just 0.2 per cent.

Of course, these are early days, and survey data can be wrong. But it was a preview of the potential damage to Abbott's credibility if the carbon does not wreck the economy. The polls show he himself is unpopular; if his campaign against the carbon tax turns out to be hollow, the political balance could swing sharply against him.

But the argument cuts both ways. If the economy goes badly in 2012-13 and I mean the economy of south-eastern Australia, where Labor has 60 of its 72 seats in the House of Representatives then Labor and its carbon tax will be blamed, regardless of whether or not it really caused the slump.

The Age economic survey last month found an overwhelming consensus among private forecasters that Australia would do well in 2012-13. Virtually none think the carbon tax to be a wrecking ball through the economy.

But the economic tides now are very uncertain. Even the Reserve Bank, with its well-documented tendency to be over-optimistic, now concedes the big risk is that the economy in 2012-13 will go worse than expected, not better.

Part of the reason for that, as the Reserve sees it, is Europe's inability to solve its problems. It is sanguine about China, although the anecdotes from there point to a more alarming slump than the statistics admit to. But it is also worried that the rising dollar is doing more damage than its models have forecast and in Australia too, the anecdotes point to deeper problems than the statistics so far show.

Most observers expect the Reserve to do nothing more than voice concern. It has never intervened in the markets to keep the dollar down, only to push it up. Deputy governor Philip Lowe said last month it was hard to make a case that the dollar was overvalued. But then, the International Monetary Fund disagrees, estimating that in June, when the $A was roughly at parity with the $US, it was already overvalued by 5 to 15 per cent.

What could we do? Two options stand out:

The Swiss solution: impose a cap on the Australian/US exchange rate, maybe at parity, and print dollars to sell whenever the cap is threatened. There is no limit on the Reserve's ability to create Australian dollars only the risk that they will end up back here adding to inflation, and the risk that it will become a huge holder of US dollars and other currencies.

The McKibbin solution: since the main surge in demand for Australian dollars is from other central banks buying them as safe investments, the Reserve should sell them directly to its cousins, printing dollars to meet their needs, and so taking pressure off the dollar in the markets.

I'll say it again: we need to talk about this. We should not let fear of trying something new cost us good enterprises and good jobs.

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At last, our dollar worries the Reserve Bank

THE Reserve Bank's view of the year ahead foresees the economy growing at trend, against a background of grey clouds: a two-speed economy, with little growth in jobs, and a lot of downside risk from Europe, and the high dollar.

It sees the carbon tax having surprisingly little impact on underlying inflation: just 0.25 percentage points in 2012-13, then no more. It sees mining investment peaking in 2013-14, barely a year away, and detracting from growth thereafter.

If you think that's easily replaced, the Reserve points out that in 2011, even net of imports, mining investment made up most of the growth in our GDP.

The Reserve is troubled by Europe. It's on edge about the US, and the partisan impasse over the budget deficit. But it's relaxed about China, seeing its economy as having hit bottom and about to rebound as stimulus measures take effect.

Part of its concern about Europe is that it sees the investor exodus from European bonds ending up here, and pushing up the Australian dollar at a time when falling commodity prices should be driving it down.

What is new in yesterday's Statement of Monetary Policy is that for the first time, the Reserve accepts that a persistent high dollar could do more damage than it expected to businesses exposed to global prices which now includes much of the economy, as the internet spreads global competition to our service industries.

The Reserve does not canvass possible solutions, such as the Swiss policy of setting a cap on the exchange rate, and printing money to keep it there or in other ways, as advocated by its former board member Warwick McKibbin.

But it sees the high dollar forcing trade-exposed business to lift productivity sharply. That implies weakened jobs growth "in the near term" and a risk of "labour shedding across a range of industries", as the high dollar combines with the housing slump and deep spending cuts at federal and state levels.

It expects unemployment will "edge higher", wage growth will slow to 3.5 per cent, and inflation even with the carbon price to remain within its target band of 2 to 3 per cent.

Yesterday's statement does not imply an interest rate cut around the corner. But it implies that the Reserve is leaning that way. It sees the risks as mostly on the downside, but is sitting back to watch what unfolds, ready to hit the trigger if its fears are realised.

Commonwealth Bank's economics team summed it up as "cautiously optimistic". Yes, but it is more cautious than it was, and less optimistic than it was.

Some analysts interpreted the rise in its growth forecasts for 2012 as indicating stronger growth ahead. Wrong. It reflects stronger growth behind us, due to the Bureau of Statistics' surprisingly high first estimate of 1.3 per cent growth in the March quarter.

The Reserve assumes this will not be revised down much, but will lift the starting point for future growth. That could be optimistic. In the past, on average, high initial estimates of growth have been revised down by 0.4 percentage points. The bureau has already revised its estimate of March quarter retail spending by that much.

The key fact is that the Reserve has left its growth forecast to June 2013 unchanged: between 2.5 per cent and 3.5 per cent. And it has cut its forecast for growth in 2013-14 by half a percentage point, to the same range.

That is, the Reserve forecasts the growth rate over the next two years to be around 3 per cent, plus or minus half a percentage point. It describes this as "around trend". Good. There is a widespread but outdated assumption that our trend growth rate is 3.25 or 3.5 per cent; that was in the days of rising debt, and the Reserve believes those days are gone.

On Thursday, assistant governor Guy Debelle forecast that credit growth will remain subdued for years. He tipped it to grow "at the pace of nominal [GDP] 5, 6, 7 per cent most likely, for the next few years. I'm pretty sure we're not going back to double digit rates."

If he's right, that will have profound implications across the economy especially for growth in house prices, and for investments that depend on them rising at the pace we saw when housing credit was growing at double-digit rates: as it did, with two short breaks, from 1964 to 2008. Stable house prices will be good for first home buyers, bad for investors.

Second, slow growth in credit will have profound effects on banks, retailers, new housing and renovations, tourism, restaurants and discretionary expenditure of all kinds.

For all our talk of "cautious consumers", households have barely begun the task of deleveraging. The ratio of household debt to disposable income has shrunk only from 156 per cent at its peak to 150 per cent. It is still three times as high as it was 20 years ago.

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High dollar. We're the second-most expensive place to do business

THE high dollar is ravaging the competitiveness of Australian business. Global consulting firm KPMG reports that Australia has become the second most expensive place to do business among the major economies, behind Japan.

In its survey of global business costs, Competitive Alternatives, KPMG finds that since 2010, costs have risen more in Australia than in any other country. Most of that is due to the sharp rise of the Australian dollar against the US dollar, which has pushed up costs in every area.

Of the 113 cities surveyed, Melbourne is now the ninth most expensive place to do business, across areas ranging from manufacturing to back office services and research and development.

Sydney is now the fifth most expensive place to do business, more expensive than New York. Among the 54 big cities in the survey, only Tokyo and Osaka put more strain on corporate profitability.

In the most extraordinary finding, Australia's electricity prices have become the most expensive of any major economy, by a long way. Electricity charges to firms surveyed were more than double those in the US and Canada, and more than 40 per cent higher than in Japan.

The Bureau of Statistics reports that in the five years to December, electricity prices shot up 79 per cent in Sydney and 74 per cent in Melbourne.

The original KPMG survey in 2010 found Australia was the third cheapest location for business of the nine Western economies surveyed.

''The Australian dollar's strength is the key driver behind the changed index results,'' KPMG Australia said. ''Australia is experiencing a once-in-a-generation resources boom that ? has boosted national income and turned around the balance of trade. A corollary has been the strong appreciation of the $A that has affected local firms' competitiveness.''

The report's authors note that ''if the currency were to decline to [the level] in the previous report [March 2010], the rankings for Australia would improve by at least 50 per cent''.

The report surveyed the US, Japan, Germany, Britain, France, Italy, Canada, Australia and the Netherlands, along with China, India, Russia, Brazil and Mexico.

Overall, China was the cheapest location for global manufacturing, and India the cheapest for global service industries. Of Western countries, Britain is now the cheapest location for manufacturing and services, and Manchester the cheapest city. Canada was the best for IT and the Netherlands the best for research and development.

In virtually every sector surveyed, Australia was the the most expensive location outside Japan. The only exceptions were in manufacturing green energy products, in which Australia was the most expensive, and digital entertainment, in which it was the fourth most expensive.

In the car industry, the higher dollar has made Australia's wages the third highest behind Japan and Germany.

One limitation of the report is that it assumes that raw materials cost the same the world over. For example, it also ranks Australia the second worst location for food processing, due to the same mix of high wages, transport and utility costs. In the real world, access to cheap farm-gate produce offsets that.

Against comparable US cities, Sydney was uncompetitive as a location in every sector surveyed. Sydney was the most expensive of any of the 113 cities for biomedical research and development, clinical trials and software design.

Australia had many strengths, including the top rating for ''overall wellbeing'', and high ratings for government, transparency and the rule of law. But often the strengths were not turned to our advantage. For example, Australia ranked second for access to university, but 11th in local graduates. It had the fourth highest public research and development spending, but ranked 10th for commercial innovation.

All four Australian cities surveyed were in the world's 10 most expensive locations. Adelaide (10th) came in marginally cheaper than Melbourne (9) and Brisbane (8), with Sydney (5) bringing up the rear. Chengdu in south-western China was the cheapest location, followed by Chennai, Shanghai and Mumbai.

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Our facts have changed. Baillieu needs a narative.

When the facts change, I change my mind. What, sir, do you do?"

- attributed to JOHN MAYNARD KEYNES

WHETHER Keynes ever voiced these exact words is a matter of dispute. What is beyond doubt is that he expressed such thoughts and we remember them because they embody a profound truth. When we find ourselves in a new situation, our ideas must be flexible to respond to it.

Australia is now in a new situation, one unlike anything we have seen before. In the year to December 2011, investment in mining grew by more than GDP did. Mining investment grew by $8.24 billion; the volume of GDP grew by only $7.7 billion.

One industry located mostly in the outback is growing very fast. Most of the rest of the economy, located in the south-eastern cities, where the bulk of Australians live, is growing slowly or not at all.

The main reason our economy has hit a wall is that the Australian dollar has risen to hover around $US1.05 50 per cent above its long-term average of US70?. This has made a wide range of economic activity uncompetitive, forced firms to close and sent tens of thousands of jobs overseas.

Second, the Reserve Bank has set interest rates at levels appropriate for mining, not for the mainstream of the economy. Lending rates for home buyers are now at 2005-06 levels. Lending rates for small business are at late 2007 levels. The economy needs stimulus, yet interest rates are contractionary.

Third, governments are cutting spending to get back to surplus, and cutting hard because revenues have been clobbered by tax losses run up in the global financial crisis, by consumers' caution and by the lack of growth.

Our facts have changed. But our governments, the Reserve Bank and the federal opposition have not changed their minds. What is happening to Australia does not fit the stories each wants to tell us. So for different reasons their policy is to ignore it, and hope that it goes away.

One luminary tells of a recent conversation with a Chinese banker, who gave him an earful of his amazement at Australia's complacency at this threat to our industries. "What is your policy to deal with the dollar at this level?" the man from the world's most successful economy asked with vehemence.

In fact, the banker knew the answer: our policy is to allow Australian manufacturing and service industries to wither, hoping this will "free up" workers to take jobs in mining without causing inflation.

This is not good enough. Our manufacturers are constantly berated with advice that they must be flexible and nimble in responding to challenges. So they do; but it is ludicrous when the advice comes from those who are inflexible in their own job: policy.

Take the dollar. There has long been a consensus in Australia that floating the dollar was a good thing; I too was part of it. The dollar rose and fell over that time, usually between US60? and US80?, sometimes higher or lower. But firms facing trouble could tighten their belts and wait for it to change.

The situation firms face now is very different. Even well-run companies that took tough decisions to adapt to the crisis are now struggling. The dollar has made imports 33 per cent cheaper on the domestic market, and exports 50 per cent more expensive overseas. That is a huge blow to our competitiveness. China would not allow it to happen to its producers, nor would Singapore, South Korea, Taiwan or any other economic success story.

The Bank of Switzerland has drawn a line in the sand; it has intervened in the market to force the franc back below 1.20 to the euro, and keep it there. Central banks can do this because they can create currency. The downside is that increasing the money supply adds to inflation. But the risk of inflation getting out of control in a flat economy is remote.

We need to talk about this. We need to talk too about why Canberra is pledging a budget surplus that will impose a contractionary budget on an already weak economy.

In effect, Wayne Swan is promising us that he will bring down a bad budget that will be the opposite of what Australia needs. And Tony Abbott and his team are attacking him for not promising to make things even worse.

The Baillieu government is in a trickier position. The states have few sources of revenue, and ours is drying up. The Victorian Treasury and its Vertigan review have told ministers they should invest more, but pay for more of it from revenue. And in a normal world, that's the right advice. Victorians need to know that when the state runs a surplus today, it is to invest it in building new infrastructure, not to lock money away in the bank.

Victoria's economic slump into near-recession has been sudden, and due to reasons beyond any state government's control. The government has taken a long time to make decisions, but it is more important that it makes the right decisions rather than fast ones. The Baillieu team has been in power just 15 months. It did not expect to win government, and it came in with a lot of baggage from opposition, most of which it has slowly cast off. It now supports myki, the regional rail link and the desalination plant. Eventually it will abandon its silly policy to put armed guards on every railway station.

Its real problem is that it has yet to decide why it's there. It needs to have a credible central policy that tackles the real problems Victoria faces. It needs to have a story to tell, and be willing to go out, meet people and tell it.

Why was it elected? Primarily because transport infrastructure had not kept up with the demand for services. Building that infrastructure should be its policy. That would lift productivity, growth and jobs. The facts have changed, but that policy would fit them.

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Treasury chief denounces subsidies, sweeping cuts

TREASURY secretary Martin Parkinson has hit out at subsidies for industry, calls for further sweeping budget cuts, and pessimism about Australia's economic future which he says is "incredibly promising".

Appearing before the Senate economics committee, Dr Parkinson implicitly poured fuel on calls to cut government support for the car industry. But he also warned that more deep spending cuts as the Coalition proposes would hurt growth for no gain.

Dr Parkinson pointed to the recession now engulfing Europe, where governments have given deep spending cuts priority over economic growth. He warned that Europe's recession would last for years and be a source of global instability.

"If you want to be really hairy-chested about this, you run the risk of getting into quite dangerous territory," he told Liberal senator Arthur Sinodinos.

Treasury, he said, estimates the combined effect of federal and state budget cuts already will cut Australia's GDP by 4.25 per cent over two years.

Dr Parkinson said there were times when fiscal consolidation could enhance growth, when budget deficits were hurting business confidence. "But that's not the issue we're confronting here." He said the dangers of deep spending cuts were magnified when trading partners all cut spending together, as in Europe now.

"When the Greeks started, the expectation was that their GDP would shrink by 2 per cent, and they would do a fiscal consolidation of 8 per cent over three years," he said.

"Now their GDP has already fallen 8 per cent in 12 months, and the fiscal consolidation is about 25 per cent of GDP. How you can consolidate back into a sensible fiscal position when your economy is shrinking so rapidly is beyond me.

"We're taking the view that Europe is going to be both in recession and probably a source of global instability for a number of years to come."

Dr Parkinson, who had earlier attacked government intervention to support industries, repeated the attack to the committee, telling Labor senator Doug Cameron that the car industry has been receiving taxpayer support for 105 years.

In a speech on Thursday night, Dr Parkinson warned that industry assistance would fail in its goal of creating competitive advantage unless it was focused, defined and limited in its term.

"If you replace quotas and tariffs with other interventions, no matter whether to create 'national champions' or to support so-called strategic industries, you are placing producer interests ahead of those of consumers," he said. "It is still akin to protection."

Dr Parkinson told Senator Cameron, the former head of the Australian Manufacturing Workers Union, that the task was to transform the car industry and the rest of Australian manufacturing into "something sustainable" with a high Australian dollar.

"The exchange rate will threaten the viability of a whole lot of industries," he said. "If you think it's going to last for 12 or 24 years, we can't pretend that things can stay the same.

"The challenge for us is, how do we help manufacturing and other sectors transform themselves so they can cope in a world where we have a high exchange rate . . . We will end up with a very successful manufacturing industry." Dr Parkinson said the best way to do this was by improving the education system, workplace skills, management skills, infrastructure and industrial relations.

His third theme was to denounce pessimism, declaring Australia was "in the grip of unjustified economic gloom".

"It's almost as if most Australians think we live in Greece. We don't," he said. "We actually have an incredibly bright future ahead of us. Yes, there are challenges, but the opportunities ahead of us are the sort we've never seen before."

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Strong dollar a local nightmare

FOR 20 years from 1985 to 2005, the Aussie dollar averaged US70c. Now it is hovering around $US1.05. At that level, the question is: does it make sense for any firm to export manufactured goods from Australia?

It's not just Alcoa, Toyota or Holden. It's any firm that exports from Australia, or competes with imports. In the currency of global trade, producing in Australia is now 50 per cent more expensive than in the past. That applies to cars, computer games, university courses or tourism.

Between 1985 and 2005, the Aussie floated between US50c and US90c. If it got too high, firms would tighten their belts, grit their teeth and wait for it to fall. This time it's different.

The dollar is now far above its old levels. Some say it could go higher. Many, most, believe it is now up there to stay. This is not just a cyclical high, it's a structural shift. And it has wrecked good business plans that had assumed a dollar in the range it used to live in.

The destruction is going on all around us. Since the global financial crisis began, Bureau of Statistics figures show, a net 127,000 manufacturing jobs have been wiped out across Australia. One in every eight manufacturing jobs has gone already. Far more than that are under threat.

Treasury, the markets and the Reserve Bank tell us the Aussie is set to remain high far into the future, maybe for decades. It may not stay at today's level, but it will stay well above the zone it lived in before the minerals boom began. This is an epochal change, which will change Australia.

Why does the level of the dollar matter? Suppose you're a manufacturer in Clayton making plastic thingos. There's a big global market, but you're competing with manufacturers in China, Korea, everywhere.

Suppose it costs you $A10 to produce a kilo of thingos. With the dollar at US70c, that makes your costs $US7 a kilo. Suppose the world price is $US9 a kilo, then you're making a decent profit from exporting.

But with the dollar at $US1.05, suddenly your costs have jumped to $10.50 a kilo, yet the global price is only $9. To export thingos now costs you money, serious money. If you think the dollar is going to stay that high, you either somehow cut costs dramatically, or give up the game.

And that's not all. Suppose your Chinese rival can produce thingos for $US5 a kilo. When the $A was US70c, his costs in $A were marginally higher than yours; you could hold him off at home. But with the Aussie at $US1.05, his costs are now less than $A5 a kilo. He can undercut you and take away your local contracts. If you think the $A will stay up here, you don't just give up exporting - you give up manufacturing.

This is a crisis that will bring many well-run firms to their knees: not because they are inefficient, but because costs beyond their control have made them uncompetitive. It is a crisis that, if the dollar remains high as forecast, will cost hundreds of thousands of manufacturing jobs.

But seeing our politicians arguing is like watching two bald men fighting over a comb.

Julia Gillard and Wayne Swan always trot out the line that Labor understands that there are people and firms who are doing it tough. OK, but what are you are going to do about it?

Tony Abbott says he wouldn't have a carbon tax. Wow. A carbon tax might add about 1 per cent to the cost of manufacturing in Australia. The higher dollar has added about 50 per cent. What are you going to do about that?

One option is to do what others do: get the central bank to drive the dollar down. That's possible. They can do that by printing money - but that's the recipe for inflation.

There's two other ways, both unpalatable: invest overseas, as China does, or stop wage growth, as Germany once did.

Our best chance was the mining tax. A 40 per cent tax on superprofits in all mineral sectors, as originally intended, would have sharply slowed mining industry growth, reducing the upwards force on the $A and allowing other industries more room to grow. But Tony Abbott said no, Labor backed off, and even its emasculated tax is yet to pass Parliament.

In the crisis, our politicians and policy advisers have failed the test - unless you think ''do nothing'' is the correct answer. This change will leave many victims in its wake.

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PM plays down job losses as 'growing pains'

PRIME Minister Julia Gillard has given a firm pledge to bring down a budget surplus in 2012-13, and played down rising job losses in manufacturing and office work as ''growing pains'' as Australia's economy moves to a higher level.

In a speech to the Australia-Israel Chamber of Commerce in Melbourne, she defended the higher dollar as recognition by global investors of Australia's economic strength and long-term prospects.

''Our success is driving the dollar,'' she said. ''In turn, the dollar is driving change, and in doing so it's making our economy leaner and stronger, forcing us to move more of our effort - more money, more equipment, more people - into the parts of our economy where we can create the greatest value.

''What is certain is our dollar is likely to remain relatively high for years to come.''

Ms Gillard also announced a new deal for vocational education students, allowing them to defer paying their fees until after graduation, in the same way as university students now do.

The government will also offer subsidised training places worth up to $7800 to students enrolling in entry-level courses in health, business, hospitality, construction, transport and other areas with skills shortages.

She gave an unequivocal commitment that the 2012-13 budget will be in surplus - implying further spending cuts and/or tax rises to offset deteriorating economic prospects.

The International Monetary Fund last month cut its forecast for Australia's growth in 2012 to 3 per cent, well below the 4 per cent the Reserve Bank forecast in November. By December 2012, this would fall to 2.5 per cent.

That would jeopardise Treasury's forecast of a thin $3.5 billion surplus in 2012-13, which assumes ongoing growth of 3.25 per cent. Chris Richardson of Deloitte Access Economics has urged the government to drop its surplus pledge and give priority to economic growth.

Ms Gillard rejected the advice. ''We will hand down a budget surplus in May,'' she said.

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Dollar set to stay high whatever the cost

FOR the 20 years to 2005, the Australian dollar averaged US70?. Now it fluctuates at about $US1.05.

If it is stays in that zone, as policymakers expect, that will make a huge difference to where our jobs are, what they are and what they pay.

It's already happening. The Bureau of Statistics says 127,500 manufacturing jobs have been lost since 2008.

That's devastation of factory work on the same scale as in 1990-91. The banks are tipped to move thousands of office jobs to India this year. Other businesses will follow. It is only a matter of time before government itself does the same.

Don't blame business. It either makes profits or goes to the wall. The 50 per cent rise in our dollar makes it 50 per cent more expensive to make things or do jobs in Australia than in the rest of the world.

You can't blame Ford or Westpac or Woolies if they shift jobs to places where they can be done more cheaply.

Yesterday Julia Gillard wanted to assure us this was a Good Thing.

She likened it to the "structural change" in the Australian economy after the Hawke government slashed tariffs in the depths of recession in 1991, with the job losses being just "growing pains". It was about "building a new Australian economy" that would be "more adaptable, more flexible and able to seize new opportunities than ever before".

Well, the businesses that survive a 50 per cent rise in relative costs will certainly have to be adaptable and flexible; that's why they will shift jobs offshore wherever possible. That will cut jobs in areas where we work in offices and factories, offset by job growth in areas with mines and pipelines.

That's why full-time jobs fell by 31,000 last year in the south-eastern states but rose by 40,000 in the north and west. On current forecasts, that will accelerate this year, as more companies adapt to the new reality.

The Australian dollar has not soared simply because the world sees Australia as a "safe haven". Since the start of 2000, the Aussie has risen 44 per cent against all other currencies, yet China's yuan rose just 16 per cent and South Korea's won actually went backwards.

Both China and South Korea have grown much faster than Australia in the past decade but they manage their currencies to keep them down so their manufacturers stay competitive.

Australia won't do that. The Reserve Bank has never intervened to stop the dollar rising, only to stop it falling. Both the Reserve and Treasury see this mining boom lasting for years and probably decades. On that assumption, they believe the dollar is in the right zone and if companies can't cope, that's their problem. Gillard agrees.

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Age Economic Survey: What we should do

AUSTRALIA'S market economists believe we have entered a long boom in minerals prices, which will keep the dollar high and make it futile to try to shield sectors such as manufacturing, agriculture and tourism from the ongoing damage this will create.

The panel of economists in The Age's half-yearly conomic survey endorses the Treasury/Reserve Bank view that surging demand from China, India and other developing countries will keep commodity prices relatively high for years and perhaps decades.

They agree this will keep the dollar high, and that in turn will drive a long decline in prospects for other trade-exposed sectors of the economy. But they argue against government support to shield these industries, other than retraining retrenched workers.

Two policy proposals won widespread support. Some in the panel urged the government to make a third try at the mining tax, to extend it across other minerals sectors and raise its rate to something closer to the original plan. Many called for the proceeds to be put into a sovereign wealth fund.

The Gillard government opposes both options. Its minerals resource rent tax, to start in mid-2012, would apply only to coal and iron ore mines, and at a rate of 22.5 per cent of profits above a generous threshold. On Treasury's estimates, most of the proceeds would be spent immediately, while others warn that the spending could outweigh the revenue.

AMP Capital chief economist Shane Oliver said: ''Industrialisation in China, India and elsewhere has a lot further to go, resulting in supply continuing to struggle to keep up with demand.

''Apart from broadening the mining resource rent tax to include all mineral commodities, the best thing governments can do is to help to make sure that the whole economy is acting as efficiently as possible by boosting infrastructure, removing impediments on the supply side of the economy, and [addressing] labour shortages by training and immigration policies.

''Artificially propping up adversely affected industries would be futile and ultimately against the national interest.''

HSBC's Paul Bloxham agreed but urged the government ''to get back to fiscal surplus more quickly'' by imposing ''a larger mining tax'', the revenues of which would be put in a sovereign wealth fund and ''put aside for a rainy day''.

Richard Robinson of BIS Shrapnel urged the mining tax be extended to gold and base metals and levied at a higher rate, although he urged that part of its revenue be used to reduce company tax rates to benefit the rest of the economy.

But Paul Brennan of Citigroup said that opportunity was lost by the mishandling of the mining tax and forecast ''it won't be revisited, at least in the next few years''. He said ''the best policy response is to support retraining of workers affected by the two-speed economy''.

ACCI's Greg Evans emphasised the need for the government to run ''structurally tighter fiscal policy'' to reduce pressure on interest rates. NAB's Alan Oster added that ''the RBA will also have to take into account the effect of interest rate hikes on the less robust enclaves of the economy''.

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Australians taking strong dollar out of the country

THE high dollar is driving Australians out of the country. In April, there was a stunning 20 per cent jump in the number heading overseas, with almost 700,000 flying out.

In breathtaking evidence of how the high dollar is shifting Australians' spending overseas, the Bureau of Statistics reports that three Australians went overseas in April for every two overseas visitors coming here.

Unreported bureau figures this week suggest that even before the April surge, more than a fifth of the growth in consumer spending in the March quarter was spent overseas by Australian tourists.

While the national accounts showed household spending up 3.4 per cent in the year to March, the detailed figures suggest the growth in household spending within Australia was only 2.8 per cent.

In the March quarter, consumer spending locally grew only 0.46 per cent. Yet in a year, net consumer spending overseas almost doubled, rising in real terms from $1.05 billion to $2 billion.

These figures exclude online purchasing from overseas websites, so actual growth in local spending was even lower.

The shift of consumer spending overseas is accelerating. Visitor arrivals in Australia grew only 3 per cent in April, and were down 3 per cent in the April quarter.

But Australians are making the most of the strong exchange rate, taking their dollars overseas, and spending them when they buy more.

A record 78,000 Australians spent April in Indonesia, which is challenging New Zealand (93,000) as our top overseas destination.

But there were also record departures for the United States (71,000), Thailand (46,000), China (33,000), Fiji (29,000) and almost everywhere else - except Australia.

The high dollar discourages foreigners, since their currency buys less in Australian stores, hotels and restaurants. In April, only 462,000 tourists came here but more than 690,000 Australians travelled overseas.

Year on year, tourist arrivals rose by by only 19,000, whereas Australian tourist departures rose by 137,000. The growth in arrivals is mostly from Asia, where soaring airfares have diverted tourists from America or Europe to nearby Australia.

Tourism and Transport Forum chief executive John Lee expressed alarm at the trend and urged the government to give tourist operators transitional help with the carbon tax.

''If international aviation is exempt, but the tax applies to domestic travel, that will encourage more people to head overseas, as travelling locally will be relatively more expensive,'' Mr Lee said.

The strong dollar had already meant that fewer Australians were taking their holidays in Australia, he said.

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IMF warns of global currency war risk

THE head of the International Monetary Fund has warned of the risks of a global currency war, as tensions over China's undervalued currency threaten to dominate this weekend's annual meeting of world finance ministers in Washington.

As Japan's central bank began intervening in currency markets to put a lid on the rising yen, the IMF again appealed to China and other emerging economies to allow the markets to set their exchange rates, rather than holding them down to gain a competitive edge.

The appeal came in the IMF's new World Economic Outlook, released overnight, which offers barely changed forecasts for growth in 2011: 4.2 per cent for the world, and 3.5 per cent for Australia.

IMF head Dominique Strauss-Kahn told The Financial Times that Japan's currency intervention made sense if its goal was "to avoid disruptive volatility", but not if it wished to influence the yen long-term.

With an understatement worthy of Casablanca, Mr Strauss-Kahn told the FT that "there is clearly the idea beginning to circulate that currencies can be used as a policy weapon.

"Translated into action, such an idea would represent a very serious risk to the world economy," he warned. "Any such approach would have a negative and very damaging longer-run impact."

China is widely seen as keeping its currency undervalued to make its exports more competitive, and hence attract more foreign investment. In the US, Congress is stepping up pressure on the Obama administration to formally declare China a currency manipulator, and take action against it.

In recent weeks, central banks in Japan, Korea and Taiwan have intervened on currency markets to stop their currencies rising. Brazil has doubled its tax on short-term capital inflows to 4 per cent. But Australia's Reserve Bank has allowed its dollar to keep rising. Last night it was trading at US97.20, up 1.5? in a day.

Markets expect it to overtake the US dollar in coming weeks for the first time since it was floated in 1983.

The IMF's latest 90-page set of forecasts virtually ignore Australia, other than to warn that it faces a "low-risk" threat of a housing crash.

For Australia, the main change is that the IMF has lifted its 2011 inflation forecast to 3 per cent but cut its forecast of the current account deficit. It predicts unemployment will be steady at 5.1 per cent.

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Garnaut's got the goods on mining taxes

QUESTION 1 is whether the slump in global markets is a crisis or a correction. Are we seeing a second wave of the panic of late 2008, or just seeing investors retreat from positions that now seem too optimistic?

Question 2 is whether the resource rent tax will damage foreign investors' long-term confidence in Australia, and hence our future growth.

The two questions are inter-related. The mining companies and their supporters tell us the plunge in mining share prices is the result of the new tax. And as we all indirectly own shares in the mining companies through our super funds, we're all worse off.

Let's put the facts. When the markets closed on Friday, April 30, the Australian dollar bought US93 and the benchmark S&P/ASX200 index stood at 4807.4.

On the Sunday, the government released the Henry report and announced it would impose the resource rent tax.

The next day, both the dollar and the market index fell, but slightly, by 0.5 per cent. Over the next two weeks both slid by roughly 4 per cent. That's a fall, but no cataclysm.

The real damage came in week three. By last Friday morning, the dollar had plunged 9.7 per cent in four days and a bit, and the sharemarket by 8.7 per cent. That's a market plunge. But then they kept rising.

The important thing is that this was not unique to Australia. Sharemarkets worldwide have fallen by similar amounts over the same period. Mining stocks in the US fell by similar amounts to mining stocks here.

The Aussie dollar fell more than most against the US dollar, but there are other reasons for that.

Commodity exporters such as Australia have manic-depressive currencies: they rise higher and fall lower than the rest when the outlook for global growth changes. Back in 2008, we went from US97.86 in July to US61.22 in October. Now forecasts for global growth have fallen, with Europe facing years of slow growth and China slamming on the brakes to head off inflation.

Second, the crisis in Europe has reversed the market's bets on what the Reserve Bank will do next. A month ago it was forecasting several rate rises ahead. Now it's punting on rates staying on hold until the second half of 2011. And that has halted the carry trade, in which investors borrow in Japan or the US at low interest rates to invest in Australia.

Third, Australia plans to impose a resource rent tax on miners, reducing the profitability of mining projects. All three are factors in our falling dollar and share values. Yet Australian shares have fallen at similar rates to the rest and bank shares have fallen as much as mining shares. To me, that suggests the new tax has been only a marginal influence.

What of the future? Your guess is as good as mine, but most analysts see this as more correction than crisis, at least outside Europe.

Asia's biggest markets are growing at incredible speed: China, Taiwan, Thailand, Malaysia and Singapore all grew by more than 10 per cent in the year to March, with South Korea and Hong Kong not far behind. That momentum would take some stopping. And the Federal Reserve is forecasting US growth of 3.2 to 3.7 per cent this year. Europe alone is in trouble.

What about us? With an election looming, it's no surprise that the mining companies have put projects on hold. I suspect they will stay on hold until the election is over and (if Labor wins) the new tax becomes law, with the support of the Greens, who will hold the balance of power in the new Senate.

In the short to medium term, you'd expect that it will lead to less mining investment than otherwise. Mining Australian deposits will become less profitable, and in some cases those projects will drop down the priority list of the multinational miners. But as I have argued before, that simply defers those projects until they become more profitable. Our mineral despots will not be moved. Coal aside, they will all be mined eventually. And the government is right to demand a better return for them.

But how? A consensus is starting to form around a sensible compromise, well-expressed last Thursday in a thoughtful, fair-minded speech by Professor Ross Garnaut at the University of Melbourne. Decades ago, Garnaut and Anthony Clunies-Ross invented the resource rent tax we now use for the oil and gas industry. Garnaut is also the long-time chairman of Lihir Gold, and has worked closely with both the Rudd government and Rio Tinto. No one knows the issues better.

There is no space to summarise his speech here: for those interested, it's at www.theage.com.au. Garnaut chastised his fellow miners for using emotive arguments and threats rather than logic, and upheld the government's right to impose it on existing as well as new projects.

But he also questioned Treasury's assumptions that mining companies could borrow money at the same rate as the government to finance their initial losses, and that future governments would honour the pledge to pay mining companies 40 per cent of their losses on failed projects.

A better solution, he argued, would be to use the Henry formula to tax mining exploration, and put his own long-established (and less extreme) tax on mining production. It's the logical solution. Pity they won't agree on it any time soon.

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